The Economist's Error and Political-Economic Behavior

Paul Krugman, a brilliant man whom I respect and whose work I follow, is making a fundamental mistake, and it points to some fundamental issues with the current assumptions of economics, assumptions that even Krugman has acknowledged as problematic in the past.

Let's back up. Contemporary economics, in order to make sense out of extremely complex systems, starts with a false but helpful assumption: all else being equal, a person will behave in a way that maximizes his own utility; that is, people make rational choices. Without this convenient assumption, microeconomics collapses, bringing down most of macroeconomics, which is built increasingly on those micro-level understandings. The thing is, people do stupid shit; they are more often than not irrational and tend to behave in ways that go against their own individual best interests--at least in the immediate and short term. Unlike economics, this is the starting place for much of sociology: Why do people do seemingly nonrational things? And, we sociologists have more than a hundred years of data, theory, and analysis to make sense of it.

So, what mistake is Krugman making? Paul is pretty sure that the new Republican strategy that he is calling "libertarian populism" won't work because it is not in the best interest of the very group at which it is targeted: disaffected, downscale, rural, Northern, working-class whites. Why, after all, would a group rally in support of ideas that hurt them? This, of course, would make absolutely no sense to economists who assume that people behave rationally. To sociologists who assume the opposite, that people typically behave quite irrationally, it makes perfect sense. Moreover, from the sociological frame, there is far less reason to believe that the Republic strategy will fail. In fact, it's likely be quite successful.

Let's take another step back. Essentially what I'm writing about here is false consciousness, the idea that people are generally unaware that they are part of a class of people with whom they share a vested interest. These disaffected, downscale, rural, Northern, working-class whites do not in fact see themselves in these terms. They are much more likely to identify, first, as white and, second, as middle-class. This is the trick. If you don't see yourself as poor and you fail to recognize that you are a beneficiary of governmental welfare programs (PDF), you are not likely to support programs for the poor or the political party that created and defends those policies. Republican policies feel populists because you associate yourself with those who actually aren't much like you at all.

Krugman is optimistic because his discipline intentionally propagates the falsehood that people are rational, which leads to the inevitable conclusion that an irrational strategy will be ineffectual. As a sociologist, I am far more pessimistic.

Sport, Economics, and The Krug

Krugman wrote this today about Ben Bernanke's recent speech:

OK, this is...basically a Rawlsian view of the world, in which you think of life as a kind of lottery in which you draw a ticket that includes things like your genetic endowment as well as the wealth of your parents. And what you're supposed to do, ethically, is support the economic and social system you would choose if you had to enter that lottery not knowing what ticket you were going to draw — if you were making political choices behind the "veil of ignorance".

As soon as you portray the choice that way, you've introduced a strong presumption in favor of redistribution. After all, if you should happen to end up as a member of the top 1 percent, an extra dollar at the margin won’t mean a lot to you; but if you should happen to end up as a member of, say, the bottom quintile, an extra dollar could make a lot of difference. So you should, other things equal, favor a system of progressive taxation and generous aid to the poor and unlucky.

So why not favor complete leveling, America as Cuba? Because for many reasons, both economic and political, we favor a market economy in which people make decentralized decisions about working, saving, and so on. And this means that incentive effects become important; you can't levy 100 percent taxation on the rich, or completely insulate the poor from any consequences of low income, without destroying the incentives you need to make the economy work. [emphasis added]

That last sentence is telling for the implicit assumptions it makes, which are, I think, telling about both popular opinion in the U.S. and the state of economics as a discipline. First, either the world is Rawlsian or it isn't; either life is essentially a crap shoot or it's driven by incentives. One does not get to make both arguments. The base assumption of modern and contemporary economics is that, all else being equal, individuals will be incentivized to behave in ways that are in their best interest. That "all else being equal," however, is a huge caveat. In effect, it says, set aside the fact that we live in a Rawlsian world. If our starting point is to set aside reality, we can play whatever deceptive game we like with the remaining evidence. Second, the "incentives you need to make the economy work" line assumes a specific type of economy, one that creates and rewards inequalities. So, the logic goes, we cannot change the rules to the current game because the rules of the current game demand that we follow these rules; if we changed the rules, we'd be playing a different game, with different rules and different goals. I posted on this before, writing:

It's like arguing that, in (American) football, it is necessary to reward teams with six points for crossing the goal line in order to give them an incentive to drive down the field and not sit idly on the sidelines. What this neglects is that it's the game of football itself--the rules of the game that we created--that establish that driving down the field toward the opponent's end zone is the goal. Now, imagine one of the participants arguing that there are other sports that we could be playing, baseball for example, with a new set of rules. Another player might complain, "But, if we allow each player a chance in the batter's box, what motivation will he have to score a touchdown?" Just like crying, there are no touchdowns in baseball.

It's impossible for us to have a serious conversation about "the" economy until we are able to realize that we are framing the discussion about "an" economy.

The Opposite of Patriotism

Please, oh please, read this new blog post from Paul Krugman. He is right. Here is the gist:

...[Patriotism] is about making sacrifices for the national good, not serving your personal motives or interests.
...
...[S]upporting policies that are to your personal financial disadvantage isn’t hypocrisy — it’s civic virtue!
...
If people can’t comprehend what it means to work for larger goals than their own interest, if they actually consider any deviation from self-service somehow a sign of phoniness, we, as a nation, are lost.

Amen.

Disciplinary Echoes

More evidence that Paul Krugman really should have been a sociologist:

...[P]eople are complicated, but gangs of people less so. Individuals are often mixed in their behavior.... But groups...tend to behave similarly on multiple fronts.

Yes, that's what we said.

Why, yes, I Would Like a 'Free' Golf Retreat to the Bahamas!

Paul Krugman wants medical doctors to decide what Medicare will cover and what it will not because insurance companies have a perverse incentive to allow unnecessary stuff to be covered so they can profit and Congress is in the pockets of many of those insurance companies and can't be trusted to make decisions that are in their constituents' best interests. I think he is right about Congress and the insurance companies, but he gives doctors a lot of undue credit. If we've learned anything from the explosive growth of Big Pharma over the last few decades it is that doctors--as much as our elected officials--are beholden to corporate interest.

The solution is simple: eliminate corporate financial influence at all levels of the government and in all sectors of the medical field.

Economic Paradigms and the Direction of the Social Sciences

Paulie has a great blog post today that cuts straight to the heart of all that is wrong with economics today and all that might be rescued in the social sciences. Writing about economics:

You try to think about what people will do in certain circumstances, and you try to understand how individual behavior adds up to an overall result.
...
...[U]nder some circumstances seemingly reasonable individual behavior adds up to very unreasonable macro outcomes.

I would say, as a sociologist, that unreasonable individual behavior often adds up to very reasonable macro outcomes.

...[M]aximization isn’t a fact about human behavior, it’s a gadget — an assumption we use to cut through the complexities of psychology and all that, one that can be very useful if it clarifies your thought, but by no means an axiom or a law of nature.

Amen!

...[W]hat happened was that the drive to base everything on maximizing behavior narrowed the profession’s thinking.... We created an economics profession which believed that [previous theoretical perspectives] had been “proved wrong”; whereas all that had really happened was that those things proved hard to model in terms of perfectly rational maximizing agents.

I've written this before, but it's worth repeating: Paul Krugman is a sociologist in an economist skin. Molt on, my friend; molt on!

The Radicalization of P. Krugman

Has this economic crisis finally radicalized Paul Krugman?

But watching the failure of policy over the past three years, I find myself believing, more and more, that this failure has deep roots--that we were in some sense doomed to go through this. Specifically, I now suspect that the kind of moderate economic policy regime...I...support--a regime that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps--is inherently unstable. It’s something that can last for a generation or so, but not much longer.

Finally! Now what, Paul?

Krugman: "The Perils Of Government By Poll, 30s Edition"

Paul Krugman today:

In light of the way we actually got out of the Great Depression, it’s instructive — and depressing — to look at polling from that era. Two results from Gallup, in March 1938:

Do you think government spending should be increased to help get business out of its present slump?
Gallup Poll, Mar, 1938

37% Yes

63% No

In your opinion which will do more to get us out of the depression: increase government spending, or reduce taxes on business?
Gallup Poll
(AIPO), Mar, 1938

15% Increase government spending

63% Reduce
taxes on business

21% No opinion

Aum Bond Shivaya, Aum Bond Shivaya

In his column today, Paul Krugman presents an analogy that I find interesting. He writes, "[T]he policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods." I think there is more to this than Paul acknowledges in the rest of the piece. The calls for austerity in the face of increasing unemployment and lagging recovery are both non-rational and super-empirical, two things that mark all religious endeavour. (Note that non-rationality is not the same as irrationality.) Because of this, I think the religion metaphor works very well. There is a certain dogmatism that persists in spite of contradicting evidence. Don't worry about what you see in the heavens, Galileo; the earth is clearly at the center.